Term Insurance: Investment or Expense?

Term insurance is a life insurance product offered by companies, which provides financial coverage to a policy holder for a specific time period. In case of death of the insured person, the policy benefits are paid by the company to the beneficiary. Though term life insurance products do not provide any returns, they offer the most important thing, a cover for your life. If an unfortunate incident takes place, it gives a lump sum amount to your family. In a way, by buying term insurance, you are ‘investing’ in securing your family’s future, so that they can take care of all their financial needs.

How does it work?

When you buy a term life insurance policy, you pay a certain amount to the insurance company regularly. This regular pay-out is known as the policy premium. Over time, the insurance company collects this premium and uses this amount to provide financial security to your family in case of an unfortunate event. Aegon Life’s iTerm Plus provides your loved ones with adequate protection, if the worst were to happen.

Investing in term life insurance

A term plan is the most basic form of life insurance. The premiums paid towards a term policy are used exclusively to cover your life. This implies that there are no external returns earned from such policies. However, the comfort, peace of mind, and the financial security that it provides in your absence make it an important investment. If you are 38, and a non-smoker, you can buy a term plan for a premium of Rs. 507 per month, and get a sum assured of Rs. 25, 00,000.

The most accurate way to calculate your life cover is to use the expense approach rather than the income approach. The difference is that it gives you a bare minimum amount of life insurance cover you should have, rather than a range.

Basic Information required for calculation of your life covered

Suppose, you have current monthly expenses worth Rs. 20,000. Annual income is Rs. 7, 00,000 without tax deduction. Assumption of inflation index is set at 6%. If you increase or decrease it by even 1%, there is a drastic difference in the calculation. Your current age is 32 years. Your retirement age is say 60 years. Number of years to go before retirement remain 28 years.

There will be large expenses in your life. For example, these could be higher education expenses for a child after 12 years or marriage expenses. Apart from these, there are medical expenses and other household expenses which cannot be overlooked. If you have more than one child, then the expenses will increase.

For example, let’s take the total large expense requirement of you at Rs. 22, 00,000.

The assumption of your existing liabilities stands at Rs. 16, 75,000. Let’s add all outstanding loans. For example, you have taken a housing loan of Rs. 30 lakhs, 6 years ago and as on date, the principal amount of Rs. 27 lakhs is still outstanding. Similarly, add auto loans, personal loans and other credit card balances if any.

The assumption of existing life insurance cover is as follows: If you have already taken some life insurance earlier and the policies are still continuing, add up the life cover (Sum Assured, not the premium) of those policies and total them. Let’s assume that is Rs. 8 lakhs.

So, life insurance cover required for you will be (20,000 * 12 *(1- (1.06)^28)/(1-1.06^28) +22,00,000 ­- 14,50,000 + 16,75,000 – 8,00,000))= Rs. 1, 78, 71,747..i.e. Rs 1.79 crores, or about 25 times the current income in this example.

Investing in term insurances is good for the long run. This investment may not be like the traditional return yielding method, but it is the safest option when you are looking to have a secure future for you and your family. Given the uncertainty of life and the variability of our savings, having a term life insurance plan is like having a safety net. The returns received in turn for the money invested is in the forms of life cover and peace of mind.

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Additional Disclaimers

THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER. THE LINKED INSURANCE PRODUCTS DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICYHOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.

For more details on risk factors, terms & conditions please read sales brochures and benefits illustrations carefully before concluding a sale. Products and as such, are subject to risk factors • The premium paid in unit linked life insurance policies are subject to investment risks associated with capital markets and the NAV’s of the units may go up or down based on the performance of fund and factors influencing the capital market and the policy holder is responsible for his/ her decisions • Aegon Life Insurance is only the name of the Insurance Company. Aegon Life iMaximize Insurance Plan and Aegon Life iInvest Insurance Plan is only the name of the unit linked life insurance contract. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns. The non-guaranteed projected investment returns of 4% and 8% are not guaranteed. Please know the associated risks and the applicable charges, from your insurance Agent or the Intermediary or policy document of the insurer .If death occurs due to suicide within 12 months from the date of commencement of risk or of the Policy, the death benefit is refund of at least 80% of the premium(s) paid provided the Policy is in-force. If death occurs due to suicide within 12 months from the date of revival of the Policy, the death benefit is higher of 80% of the premiums paid till the date of death or the Surrender Value available as on the date of death. If death occurs due to suicide within 12 months from the date of exercising life stage option (resulting in the increase in death benefit), the death benefit is the aggregate of the following: Original Total Sum Assured, plus any increased Sum Assured purchased by exercising the life stage option prior to 12 months from the date of death (due to suicide); plus 80% of the premiums paid for the last increase in Sum Assured. The premiums paid and benefits received are eligible for tax benefits under section 80C and 10 (10D) of the Income Tax Act of 1961, respectively on fulfilment of conditions laid down for availing such benefits. Please consult your tax advisor for details. Goods & Services Tax announced by Government or statutory body in future would be levied as per the applicable laws.